Premier Foods shows promise as activists jostle
Premier Foods [LON:PFD] has an unfortunate tendency to shoot itself in the foot, and today’s full-year numbers are no exception. GBP 87m of exceptional charges on pensions, asset impairments and restructuring charges took the shine off an otherwise reasonable set of numbers.
Activist interest in the stock, reports of a break-up, long-running takeover speculation and a lowly valuation are all factors which mean it could be worth looking through the noise and focusing on Premier’s underlying progress.
Revenue grew 0.6% in the year to 31 March with an acceleration in the fourth quarter to 3.1%. Trading profit - management’s preferred measure of performance - gained 4.5%, driving an 11.5% improvement in earnings per share, meaning that Premier trades at 4.2x underlying earnings.
Premier's lowly valuation is borne out of concern about its capital structure. Net debt to EBITDA at 3.2x is expected to improve in the year ahead, according to management expectations, after declining from 3.6x a year earlier. Pensions are Premier’s main problem: it has a net pension surplus of GBP 310m, but one of its schemes carries a substantial GBP 386m deficit, net of tax. Investors rightly worry about this, though over the longer term, it may be less of an issue: Premier has the right to refund any excess in its RHM scheme, according to its last annual report, which has a surplus of GBP 695m.
As a result, there is an argument that pensions should not represent a poison pill so insurmountable as to kill either the investment case for Premier Foods or its prospects as a takeover target. Pensions proved no barrier to takeovers of other UK assets with solid brands like chocolatier Thorntons and household appliances specialist AGA, each of which were bought out by larger peers better able to manage their sizeable pension obligations.
Breaking up the business, which is under consideration, according to media reports, represents a lower quality solution for Premier compared to a buyout of the whole company, the Flash has previously argued. Premier has historically paid too much for assets and sold them too cheaply. Also, shrinking the business further makes little sense in the context of Premier’s current capital structure.
Activist investors Paulson and Oasis both now have board seats after a February reshuffle and the launch of a strategic review. Creative solutions to improve Premier’s pension situation and operating performance should be top of the board’s priorities after another set of results which demonstrate promise rather than significant progress.